October 19, 2016
When trading financial markets, traders have to consider both technical and fundamental analysis. Technical analysis refers to using patterns that form on the left side or the chart, in order to forecast future prices.
Moreover, technical analysis consists of using indicators (trend indicators or oscillators) in order to find out support and resistance levels or to have an idea if a trend is still valid or not. There are a lot of trading theories to be considered as well, like VSA (Volume Spread Analysis), Elliott Waves theory, Gartley, Pitchfork, Gann, Point and Figure, etc.
Fundamental analysis, on the other hand, deals with economic releases that are making markets move as well as geopolitical events, natural phenomena, etc. In other words, all things that can influence markets.
While the overall technical and fundamental analysis principles are well-known by traders, they should be used depending on the financial product that is traded. If the forex market is traded, there are specific technical and fundamental aspects to consider. If the stock market is traded, both technical and fundamental analysis are different.
Trading the forex market can be made having in mind three different time perspectives: short-term, medium and long-term expectations. Short-term oriented traders are being called scalpers and they are interested in multiple entries on a daily basis with the purpose of profiting from quick moves that characterize the forex market.
For such traders, technical setups are the basis for their trades and these setups are being used on lower time frames, like the five minutes and even the one-minute charts. Fundamental news does not really matter as they barely represent the reason why the market is moving and not the actual cause.
Swing traders are using both technical and fundamental analysis for their trades and the time perspective is anywhere between a few days to a few weeks. Trading theories, support and resistance levels, and timeframes up to the daily chart are used in swing trading the forex markets.
Investors are part of the forex world as well, and these traders are using bigger time frames, like the weekly and monthly ones. However, the main reason to invest in currencies comes from fundamental shifts in monetary policies around the globe, so the technical analysis is not that important here.
When it comes to the stock market, there are two things to be taken into account: trading an index (Dow Jones, S&P500, DAX, FTSE, etc.,) or trading an individual stock. The trading process is quite different as it requires different things to consider, both from a time perspective, as well as from the technical or fundamental factors to use.
To successfully trade an individual stock, this can be done either on a daily basis (day trading) or with a medium term horizon. On a daily basis, technical analysis should prevail, while on the medium to long term, the nature of the business, its cyclicality, future prospects, dividend dates, shareholder’s meetings, etc., are things to be taken into account.
Trading an equity index, though, is more similar with trading the forex market in the sense that monetary policy will influence the index in the same way it is influencing the forex market. For example, stocks, in general, react positively when monetary policy is eased, or negatively when a new tightening cycle starts.
Another important distinction between the forex and the stock markets is being given by the fact that volume trading theories cannot be used in the first instance. The forex market is the biggest one in the world and no single broker is showing the overall volume, but only the volume of that respective broker.
On the other hand, trading an individual stock with volume spread analysis might have a different result as the actual number of stocks that are being traded is known in advance.
Trading times are not the same for the forex and stock market as well. While traders can use futures to have an idea about how the stock market will move after its closing hours, it is not possible to track individual stocks. One way would be to use CFD’s (Contracts for Difference) do to that, but even in this case, the offering is quite limited.
Forex market is opened 24/5 and even over the weekend when events are hitting the wires. Such events are being seen at the opening on Monday when most likely a gap will be present. Stock markets, on the other hand, are gaping on a daily basis when a cash index or stock opens, so gap trading theories should be applied having in mind the differences between the two markets.
All in all, it is important to remember that the forex and stock markets are two different entities, and, while they do have some common factors that influence their behavior, trading them should be subject to different strategies.
